High transaction costs, whether natural or artificial, could delay the transfer of property rights from lower-value use to higher-value use.

The 1930s were the Dust Bowl years in the semi-arid Great Plains states1. Sustained strong wind blew away an average of 480 tons per acre of top soil that had been weakened by severe drought. But the severe drought in the 1950s and the late 1970s did not produce similar wind erosion in these states. What transpired between the 30s and the 50s/70s that led to such different scenarios?

Perhaps the single most important change has been the enlargement of the average farm size. In 1930, 64% of the farms were less than 500 acres even after years of slow consolidation from the original 160 acres under the Homestead Act. In 1978, only 40% of the farms were under 500 acres. With larger farm size, farming practices that were more environmentally friendly became financially feasible. Specifically, some part of the larger farm could be set aside for livestock pasture instead of being plowed over for crops. There would also be enough land to do strip cropping (alternating bands of fallow and crop) that could better mitigate drought and protect soil.

The Homestead Acts granted titles to household heads who had continuously resided and cultivated the assigned land. The average farm size of 160 acres in the semi-arid Great Plains was based on the successful farm size in the wetter Mid-West. That 160 acres were too small to be economically viable was indicated by the much higher failure rate among smaller farms. Surviving farms were not only larger, but were also more diversified into livestock.

In theory, it does not seem to matter how small the homestead farms were to start with. If the original size were found to be too small, the failing smaller farms would be bought out by the more successful larger farms. Through this natural process of consolidation, the optimal farm size would be reached. The slow rate of farmland consolidation in the Great Plains showed that this process did not always work smoothly.

A number of factors intervened to slow down consolidation. First, failing farmers were reluctant to sell for lack of alternative employment opportunities in the region. Second, once homesteads of a given size were established, small farmers became an influential constituency that politicians in the Great Plains sought to protect. Third, local politicians and officials of the Department of Agriculture did not want to lose much of its constituency in the region. Fourth, the number of representatives in the House was at stake, as were property values in rural communities and related investment in schools and other infrastructure. These and other factors motivated the politicians to lobby for subsidies to maintain the small farms through various Federal agencies. As a result of intense lobbying, 3 out of 4 farmers in the region received federal aid during the Dust Bowl year. These subsidies helped to delay the consolidation of unviable small farms.

In other words, political interference increased the transaction costs of farm-land consolidation. With such artificially created transaction costs, the original allocation of property rights became critical in achieving the viable farm size.

Note:

Eastern Montana, eastern Colorado, the western Dakotas, western Kansas, eastern Oklahoma, eastern New Mexico, western Nebraska and central Texas.

Eastern Montana, eastern Colorado, the western Dakotas, western Kansas, eastern Oklahoma, eastern New Mexico, western Nebraska and central Texas.

References:

Libecap, G. D. & Hansen, Z. K. "U.S. Land Policy, Property Rights, and the Dust Bowl of the 1930s." Working paper. University of Arizona, 2001.

Coase, R. "The Problem of Social Cost." Journal of Law and Economics 1960.